Shearman & Sterling recently released its annual “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”
Year in and year out, it is one of the best law firm generated FCPA year in review publications.
For years, Philip Urofsky (a former Assistant Chief of the DOJ Fraud Section where he handled FCPA matters) has been a primary author of the publication and in connection with this year’s release Urofsky announced that it would be his last “FCPA Trends and Patterns” publication as he is retiring.
The best part of the yearly “FCPA Trends and Patterns” publication is the section titled “Perennial Statutory Issues.”
In pertinent part, this year’s installment states:
“Enforcement officials have met with mixed results as they continue to pursue aggressive actions and test the limits of FCPA jurisdiction.
In September, the DOJ won an initial victory over a challenge to venue in the E.D.N.Y. against Roger Ng, former Goldman Sachs executive who has been implicated in the 1MDB bribery case. Ng had argued that the DOJ’s vague reference to his alleged employer “U.S. Financial Institution #1” was an attempt to conflate Goldman Sachs Group, Inc., which is an issuer under the purview of the FCPA, and various Goldman subsidiaries which Ng argued would not be issuers for the purposes of the FCPA. Shortly after Ng raised these objections in November 2020 the DOJ filed a superseding indictment. Judge Margo Brodie held that the superseding indictment mooted Ng’s claims related to venue when it specified that Ng was liable specifically as an employee of Goldman Sachs Group, Inc. and as a stockholder in Goldman Sachs Group. While Judge Brodie’s holding is not surprising, it is a positive sign that the DOJ was required to revise its vague language to get a jurisdictional hook, though even this hook is tenuous at best.
The Ng case highlights the ongoing jurisdiction tit for tat between the E.D.N.Y, the S.D.N.Y. and the D.N.J., and the lengths, or in this instance the depths, to which the districts will resort to claim jurisdiction over high-profile matters. The Eastern District’s entire claim of jurisdiction is based on Ng’s alleged and likely unknowing use of communication wires that travel through New York Harbor on their way to Manhattan—and in the process laying claim not only to the East River, whose waters at least touch the Eastern District but also the New York portion of the Hudson (on the other side of Manhattan) and presumably the Harlem River (which runs entirely within the Southern District), and the entirety of the New York Harbor on behalf of the Brooklyn-based office (i.e., all adjacent waters). Whatever legal merit these claims to jurisdiction may hold, it is yet another example of how the competition between the different offices results in odd venue choices and tenuous connections to the districts in which cases are ultimately tried or resolved. Presumably the ultimate decision as to in which district the case would be charged lay with the Fraud Section at Main Justice; we could only speculate what benefit the Fraud Section may have believed would result from choosing the Eastern District over the Southern District.
The DOJ has fared less well in other jurisdictional battles. For example, in November 2021, Judge Kenneth Hoyt of the Southern District of Texas ruled that there was no jurisdiction to pursue FCPA charges against Daisy Rafoi-Bleuler, a Swiss citizen. The judge noted that the only jurisdictional tie alleged against Rafoi-Bleuler were communications that had traveled through the U.S. Judge Hoyt held that jurisdiction under the FCPA could only be found if Rafoi-Bleuler were an agent, officer, or director of a domestic concern or if she had committed a crime on U.S. soil. Noting that the DOJ only charged Rafoi-Bleuler with conspiracy to violate the FCPA and that none of her alleged conduct occurred in the U.S., the court held that the DOJ had failed to allege facts sufficient to find an agency relationship between Rafoi-Bleuler and a domestic concern. The DOJ has since appealed this ruling. If the ruling stands, apart from the agency aspect discussed below, the court’s decision calls into question the jurisdictional basis of a number of previous corporate resolutions, dating at least back to the Magyar Telekom, if not even earlier, where the sole U.S. nexus to the alleged bribery was premised on email traffic through the U.S. without any presence or conduct in the U.S. Indeed, Section 78dd-3, the sole basis for prosecuting non-issuer foreign companies and individuals (other than agents) requires that the U.S. nexus (use of interstate instrumentalities or other acts) takes place “while [the defendant is] in the territory of the United States”, suggesting that mere consequences in the U.S. by foreign persons, including perhaps correspondent banking transactions, is not sufficient.
The Rafoi-Bleuler case also echoes that of Lawrence Hoskins, whose own FCPA-saga continues nearly twenty years after the alleged conduct occurred. Hoskins was acquitted of FCPA charges in 2019 (though he was found guilty on five money laundering charges), and the Second Circuit heard the DOJ’s challenge to that acquittal this past August. Like Rafoi-Bleuler, Hoskins is a foreign national charged with conspiracy to violate the FCPA, and like Rafoi-Bleuler he has argued that the FCPA charges against him should fail as he is not an agent, officer, or director of a domestic concern.
Related to both these cases is a recent ruling by the Second Circuit in U.S. v. Bescond wherein the court held that foreign-based defendants whose entire alleged conduct occurred in non-U.S. jurisdictions need not physically appear in the U.S. to fight charges against them—and thereby risking imprisonment in the U.S. This key ruling empowers foreign FCPA defendants to fight allegations made against them and removes a key bullying tactic – fugitive disentitlement (i.e., preventing a defendant from raising legal or jurisdictional challenges unless that defendant first physically appears in court, an act which inevitably results in the arrest and possible detention of that individual while his challenge to the overall legality of the proceeding is argued and decided by the U.S. courts) – from the enforcer toolkit.
While enforcers have seen some jurisdictional setbacks, the SEC secured a win related to tolling agreements, allowing it continued flexibility in its investigations. While we all may utter a collective groan at the Second Circuit’s ruling in SEC v. Fowler, wherein the appellate court gave its blessing to the SEC’s use of tolling agreements in its (often extended) civil investigations, this ruling only maintained the status quo. Fowler had attempted to evade the SEC by arguing the statute of limitations for the conduct at issue, which began in 2011, ran out in 2016 and further arguing that the SOL was jurisdictional and so not subject to tolling. The court was unmoved by this argument and noted that if Congress had wanted the SOL to be jurisdictional it would have explicitly stated so. The court further noted that Fowler’s case was a poor basis for upending years of established precedent. The DOJ also faces a challenge to its tolling practices in U.S. v. da Costa Casqueiro Murta (related to the Rafoi-Bleuler case), but the judge has yet to rule on it. The defendant has challenged the ability of the government to bring charges in 2019 for conduct that occurred in 2013, but the DOJ has argued it was allowed to toll the SOL for three years while seeking evidence in a foreign jurisdiction.”
For many years, Urofsky has been an informed and candid voice on FCPA issues. (See here, here and here for FCPA Flash podcast episodes with Urofsky). Set forth below are some of Urofsky’s most relevant critiques.
As highlighted here, as an expert in a case Urofsky noted that negotiated FCPA enforcement actions with corporations contain allegations based on government inferences and extrapolations from the evidence and that there is no finding by a court on the appropriateness or sufficiency of evidence of the allegations.
In this article, under the heading “Eliminate Overlapping Enforcement Jurisdiction,” Urofsky wrote:
“[T]he FCPA originated in an SEC investigation into cash slush funds maintained by issuers. Perhaps because the SEC initially brought the problem to Congress, it gave both DOJ and the SEC jurisdiction over these provisions.
In the first twenty years of the statute, the SEC brought almost no actions under the anti-bribery provisions. More recently, for various reasons, it has taken a greater interest in that part of the statute, and it is now a rare case involving an issuer that does not have both a criminal action by DOJ and a parallel civil action by the SEC. Indeed, in the 2010 reorganization of the SEC’s Division of Enforcement, the FCPA was identified as one of five areas of concentration and there are now reportedly over thirty enforcement attorneys, as well as in-house experts and accountants assigned to investigating FCPA cases.
The SEC’s enforcement of the anti-bribery provisions raises a fundamental matter of fairness. Take two companies, one public and one private, and assume that both violate the FCPA and realize the same illicit gain from the violation. The private company will be subject only to DOJ’s jurisdiction and will therefore be exposed to a criminal fine of up to twice its gain. The public company, on the other hand, will be subject both to that criminal fine and to a civil fine and disgorgement of the illicit proceeds, thus potentially paying a third more in fines than the private company for the same conduct.
We respectfully submit that bribery, as opposed to books and records, is far from central to the SEC’s mission of protecting investors. Out of fairness, the SEC should get out of the anti-bribery business.”
Through the years, Urofsky has also been one of the more forceful critics of a common FCPA enforcement approach of holding parent companies seemingly strictly liable for subsidiary conduct. (See prior posts here and here). In an article titled “The Ralph Lauren FCPA Case: Are There Any Limits to Parent Corporation Liability?” Urofsky wrote in pertinent part:
“The facts of the case … point to the steady entrenchment of a more ominous prosecution theory: an approach that appears to approximate strict criminal and civil liability of parent corporations for their subsidiaries’ corrupt acts. Although this disregard of corporate structures has been hinted at in previous SEC matters – and the theoretical underpinnings discussed in last year’s DOJ/SEC Resource Guide – the RLC case puts both agencies firmly in the camp of this aggressive and unprecedented expansion of corporate liability.”
“This approach, however, fails to honor the corporate form and the black-letter rule that to ‘pierce the corporate veil’ the government and other litigants must show that the parent operated the subsidiary as an alter ego, and itself paid no attention to the corporate form. Moreover, it is contrary to the language of the [FCPA’s] original history.”
In conclusion, Urofsky stated.
“It is disquieting [that in the RLC case] the DOJ appears to have jumped on the charge-the-parent bandwagon, bringing a bribery case against a parent without alleging any involvement by the parent in those violations. One can only speculate that it did so because it had no jurisdiction over the foreign subsidiary itself, given that it also did not allege any act by the subsidiary in U.S. territory. However, as always, the maxim that bad facts make bad law applies, and evidentiary weaknesses cannot excuse the distortion of the statute’s previously clear and reasonable allocation of responsibility.”
As highlighted here, Urofsky continued the critique as follows:
“We have previously highlighted the SEC’s disconcerting practice of charging parent companies with anti bribery violations based on the corrupt payments of their subsidiaries, even when the facts alleged in the pleadings do not establish any parental involvement in bribery. In the Ralph Lauren case, both the SEC and DOJ took an even larger leap, by seemingly imposing apparently strict criminal and civil liability on a parent company for the corrupt acts of its subsidiary. […] Neither agency … included any allegation of any authorization, direction, or control by RLC of its subsidiary’s corrupt conduct, or even its knowledge of such conduct. […] [T]he government apparently intends to treat a subsidiary as the parent’s agent by focusing not on the formal relationship, present in all cases, between a parent and a subsidiary, informed by the practical realities of how the parent and subsidiary interact, and then apply “traditional principles of respondeat superior” to hold the parent liable for bribery by the subsidiary, whether or not specifically authorized, directed, or controlled by the parent. Under this theory, a subsidiary is virtually always an agent of its parent, and thus the parent is strictly liable for any acts ‘‘within the scope of [the agent’s] duties’’ and intended to benefit the parent—even if the parent had policies prohibiting bribery. This flagrantly disrespects the corporate form and the black letter rule that to ‘‘pierce the corporate veil’’ the parent must have operated the subsidiary as an alter ego and itself paid no attention to the corporate form. Although we have noted elements of this approach in prior SEC actions, the DOJ’s espousal of such a theory is particularly worrisome, as it impacts non issuer domestic concerns and foreign companies —a much broader universe of companies. […] The fact that the Ralph Lauren case was resolved through an NPA rather than a DPA (or a guilty plea) does not excuse this approach—when the DOJ announces it will not prosecute but requires the company to admit to facts establishing a criminal violation of the law, it is stating, as a fact, that the company committed a crime. In such case, it is obligated to demonstrate, through the pleadings, in whatever form they are presented, that it could, in fact, prove each and every element of the offense.”
Through the years, Urofsky has also questioned whether the FCPA’s obtain or retain business element has been satisfied in various FCPA enforcement actions.
As highlighted here, commenting on the Layne Christensen enforcement action, Urofsky wrote:
“While a relatively unremarkable case at first glance, the SEC’s charges against Layne Christensen reflect a troubling approach by enforcement agencies to disregard the “business nexus element” of the FCPA’s anti-bribery provisions. These recent practices appear to contradict the Fifth Circuit’s opinion in United States v. Kay and create greater uncertainty as to the scope of the statute.”
[…]
Although a seemingly unremarkable case in a field known for blockbuster settlements, Layne Christensen illustrates a troubling practice by the SEC and US Department of Justice to disregard the “business nexus element” of the FCPA. Specifically, the FCPA states that to violate the anti-bribery provisions of the law, the defendant must pay a bribe “to assist the issuer in obtaining or retaining business . . . .” While it is often the case that bribes are paid on a quid pro quo basis in exchange for the award of valuable contracts, there are additional scenarios, like that seen in Layne Christensen, where the bribes merely assisted the defendant to improve its profit margins. In United States v. Kay, the Fifth Circuit held that bribes made in exchange for a reduction in tax liability or customs duties did not per se violate the statute without proof that the increased profits were used to obtain or retain some form of business.”
“Layne Christensen is further evidence that the DOJ’s and SEC’s current approach to the “business nexus element” of the FCPA flies in the face of Kay. By charging companies (often under extreme pressure to settle the case against them) with facts that do not show how the bribes were used to assist in obtaining or retaining business, the DOJ and SEC have created significant uncertainty as to the scope of the FCPA.”
[…]
“The SEC’s case against Layne Christensen demonstrates that the government continues to follow the practice … [of] treating the “business nexus requirement” as a seemingly unnecessary feature of the FCPA.”
[…]
“Strikingly, short of simply parroting the language of the statute, the SEC made no effort to allege facts as to what specific business was obtained or retained as a result of the reduced tax liability and customs duties. Such a pleading is clearly at odds with the Fifth Circuit’s opinion in Kay which stated that while bribes in exchange for increased profitability could violate the FCPA, they would not, per se, constitute criminal conduct without an allegation that the increased profits were used to obtain or retain business.”
[…]
“Whether the DOJ’s and SEC’s approach to the business nexus element of the FCPA stems from a misinterpretation of Fifth Circuit’s opinion or an active attempt to challenge Kay remains to be seen. Nevertheless, the lack of clarity ultimately disadvantages defendants who may be pressured to settle charges over conduct which does not necessarily constitute a crime.”
As highlighted here, Urofsky previously wrote:
“The Panalpina cases and certain allegations in other cases are likely to reopen the debate as to the meaning of the “obtain or retain business” element. This element is recognized as a critical factor in narrowing the scope of the FCPA. How much it does so, however, has long been a matter of debate. In its 2004 decision in U.S. v. Kay, the Fifth Circuit appeared to have ended the debate, holding that the FCPA was not limited to bribes to obtain business from a foreign government or even to bribes that led “directly to the award or renewal of contracts.” Analyzing the indictment in that case, the court held that “bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription.” (emphasis in original). The court warned, however, that the scope of the statute was not limitless, stating, “We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”
Although some of the bribes in the Panalpina cases were made to obtain contracts and other specific business advantages, most of the payments were made to customs or tax officials to reduce duties and taxes, to expedite customs clearances, or to evade import regulations. In the latter cases, the government made very little effort to link such payments to obtaining or retaining business. For example, in Pride International, the DOJ alleged a number of what it termed “bribery schemes,” including payments to a Mexican Customs Official “to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.” Similarly, in GlobalSantaFe, the SEC alleged that through a number of “suspicious payments” the company “avoided costs and gained revenue.” Without more explanation, such barebones allegations create the impression that the government equates gaining revenue or reducing costs generally with “obtaining or retaining business.” That, however, is the very opposite of the holding in Kay […].”
“Reading between the lines of the pleadings, we can, in many cases, construct some theory of how certain of the payments might have fallen within the Kay rule, e.g., some payments appear to have allowed the importers to bring in equipment and rigs without which they could not perform new or existing contracts. It is even possible that, similar to the facts in Kay, the importers could not have competed for existing or new business had they paid the full duties or taxes or complied with other local requirements. The pleadings, however, for the most part only hint at such an underlying rationale, leaving us to wonder exactly what does the government think the business nexus means today?”
Urofsky continued:
“When criminal liability is at issue … it is important that the borders of the statute be carefully limned. Unfortunately, the government’s pleadings in the Panalpina cases do more to blur than clarify the limits of the law. For example, in some cases, the DOJ did not even plead the language of the FCPA but used instead that of the OECD Convention. For example, in Pride International, the conspiracy count alleged that the payments in question were ‘to make corrupt payments to a Mexico government official in order to obtain or retain business and to obtain other favorable treatment.’ Similarly, in the Noble NPA, the DOJ stated that the FCPA was intended to prohibit bribes ‘for the purpose of obtaining or retaining business or securing any improper advantage.’ In each case, the italicized language is simply not a part of the statutory element.”
For his years of informed and candid FCPA commentary, hats off to you Mr. Urofsky.
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